Holding the Construction Lender Liable

In these tough economic times many construction liens are often erased by superior mortgages, such as when the lender forecloses on the property.  In the past this would often lead to the lienor being left without a way to collect if the project owner was insolvent.  Florida Statute §713.3471 and a recent ruling in Whitehead v. Tyndall Federal Credit Union has, however, provided another avenue for a lienor to recover costs.

 Fla. Stat. § 713.3471 makes construction lenders potentially liable to lienors if a construction loan’s funding is terminated before all of the loan proceeds are distributed to those performing work on the project.  The statute provides that a lender can only stop funding under a construction loan or reallocate construction loan proceeds for a non-construction purpose if the lender first provides statutory notice to the contractor and lienors who have served notice to the owner.  Failure to do so can lead to the lender being liable to the lienors for all actual construction costs incurred up to the amount of the loan plus 15% for overhead and profit from the date on which the notice should have been given until the date it was actually given.  The statute also provides that a lienor may have an equitable claim if the lender knew that the lienor was working on the job while the loan was in default, but did not foreclose because they wanted their equity position to improve.

 In the recent case of Whitehead v. Tyndall Federal Credit Union the court interpreted the statute to make a lender liable to an original contractor when the lender failed to pay that contactor, but instead paid a replacement contractor.  The lender claimed that it followed the statute by fully funding the construction loan when it disbursed the final amount to the replacement contractor.  The court disagreed and stated that the purpose of the statute was to prevent the unjust termination of payments to a contractor who continues work, without any notice from the lender that payments will be terminated.  Under Fla. Stat. § 713.3471(2)(a), once a lender knows that it will stop advancing funds to a contractor or any other lienor, the lender has a duty to notify the contractor of its decision.

 It is important to consider all avenues for recovering costs when you are not paid.  Florida law has provided a way to achieve this by going after the lender when they do not keep their end of the bargain.  If a lender forecloses on a project to which you are still owed money review the loan documents to see if the project was fully funded.  If not you may have a claim under Fla. Stat. § 713.3471.